How Student Loan Consolidation Works

Consolidating student loans combines multiple loans under one umbrella so you can make just one payment. Xsandra/Getty Images

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It's estimated that two in three college students who graduated in 2018 left school with student loan debt, according to The Institute for College Access & Success. Given that tuition at some of the more prestigious universities can reach nearly $60,000 per year, and even a public community college two-year degree can cost more than $15,000, college loan debt can be overwhelming.

Considered on a national level, student loan debt becomes staggering. Currently, 45 million American borrowers owe more than $1.56 trillion in student loan debt, according to Student Loan Hero. Americans have 70 percent more student loan debt than credit card debt.

A significant factor responsible for the exponential growth in student loan debt is interest. Think about it. You borrow $15,000 at 6.8 percent per year to pay for a two-year degree in automotive technology. When you graduate, you'll have 10 years to pay, or roughly 120 payments of $172 and change. When you're done, you'll have shelled out roughly $20,000 to pay for the loan and interest.

Sadly, this represents a mild example. Among households with student loan debt, the average owed is more than $46,000, according to a 2019 study by NerdWallet.

Let's up the ante. Shoot for a four-year degree at an expensive university or college, and according to statistics, you'll likely have about $50,000 in loans when you graduate. With the same interest rate and loan payment period, you're looking at a monthly payment of about $575 and total interest of about $20,000 for a total principal and interest of $70,000.

While making the payment is daunting enough, you're likely to end up with several different student loans, all with different payment structures, interest rates and formulas. Even if you have all federal direct loans and just one servicer, your loans can be "grouped" and require separate payments.

This is where student loan consolidation comes in. In short, it's a way of grouping disparate loans under one umbrella and making a single payment via one loan servicer. But "consolidation," while having a specific meaning, is more of a general industry term and can be used loosely to refer to a few different strategies.

What's more, student loan consolidation can be a good idea for some, and a bad idea for others. Read on for more information on consolidating student loans.